Trends—April 2013

Home Depot Integrates Clicks With Bricks

Meeting e-commerce demand remains a moving target for many retailers—literally and strategically—and their creative ideas are flowing. Every day brings a new development, then trial, error, success, and innovation. As distribution strategies mature with the growth of omni-channel fulfillment, e-commerce offers boundless opportunities for entrepreneurial retailers.

One such company is The Home Depot, which is folding direct fulfillment into its existing brick-and-mortar distribution blueprint. Mark Holifield, senior vice president of supply chain for The Home Depot, discussed this move with Inbound Logistics during a recent meeting at the Georgia Logistics Summit.

Home Depot customers—whether they're ambitious homeowners, contractors, or small businesses—have a knack for do-it-yourself verve. The retailer's Web site is often their first stop for any and all home improvement queries. Shoppers can look online to compare products, visit stores to "touch and feel" them, then buy on site or online.

Home Depot is striving to create an "interconnected retail" experience for consumers that blends the best of brick-and-mortar and virtual service, according to Holifield. This may entail buying online and picking up product at a store, having inventory shipped to a store, or returning online orders direct to a store. Eventually, it may also include same-day or next-day fulfillment from stores.

This effort is so important that Home Depot added interconnected retail to its three-legged business model, joining product authority, productivity and efficiency, and customer service. From a distribution and logistics perspective, e-commerce impacts all these areas. It's the dovetail joint for 21st-century supply chains.

Traditional brick-and-mortar retailers such as Home Depot have quickly recognized the importance of managing direct fulfillment. But they also understand the leverage they have with customers from a service perspective—something virtual marketplaces lack. Whether it's taking in the IKEA experience or enjoying a Cabela's shopping safari, retailers are appealing to consumers on a more personal level.

This engagement extends to how retailers serve customers, especially when it comes to mixing direct fulfillment and in-store capabilities. Home Depot stores stock about 35,000 different SKUs; its direct fulfillment DCs carry three times as much. The key is optimizing physical presence with fulfillment capabilities, says Holifield.

Figuring out the right strategy is important because direct fulfillment adds complexity and cost to the supply chain. That's why Home Depot has purposely kept its retail flow-through and e-commerce operations separate.

"The flow-through centers handle 70 percent of our SKUs," Holifield says. "We have 18 retail DCs that are situated based on the store locations and the U.S. population. Our inventory doesn't lend itself to pick, pack, and ship."

Home Depot's flow-through DCs are homogenous in terms of technology and materials handling equipment. "You can walk into any DC and you wouldn't know if you were in Topeka or Salem," explains Holifield.

The e-commerce side displays less consistency. Different markets have unique wrinkles. Home Depot currently operates direct fulfillment centers in Hagerstown, Md., Baton Rouge, La.—which will soon be replaced by one in Atlanta—Mexico, Mo., and a new one coming online in southern California. They will always be regional in scope to take advantage of parcel-shipping zones.

Home Depot's objective moving forward is to standardize direct fulfillment DCs much like its retail facilities. But it's a challenge, especially as the rules of engagement for e-commerce continue to evolve.

"Direct fulfillment is the hardest to figure out," Holifield says. "The same question has multiple answers, which are tied to products and location. An answer in Paducah may be different than Atlanta, which is different from Waco."

The types of challenges retailers encounter as they align their omni-channel distribution networks also creates new opportunities. E-commerce is still a new phenomenon for many companies. A pioneering spirit drives creativity and innovation inside the warehouse and beyond.

For example, Google debuted a pilot project called Shopping Express, which provides same-day delivery in the San Francisco area for local and national retailers including Target, Walgreens, Staples, and Toys R Us. Consumers can specify a delivery window or provide special instructions for Google's couriers. It's akin to Amazon's Prime service.

Not to be outdone, Walmart announced its intention to explore the potential of coordinating with store customers to make home deliveries to online shoppers. Tapping customers to transport goods would put the world's largest retailer squarely in the middle of the new "crowd-sourcing." Walmart will have to clear some significant hurdles to make this a reality—notably on the legal side—but it's not beyond the realm of possibility.

E-commerce is also impacting traditional distribution paradigms, noted UPS during a recent interview with Inbound Logistics. As more people buy online, parcel carriers such as UPS are challenged with delivering packages when customers are home. Failed deliveries are a drain on driver efficiency. One solution might be using the corner shop—a central meeting point where people gather daily in urban areas, especially in parts of Europe—as a quasi depot to drop off and pick up parcel shipments.

If one fast rule governs the way retailers approach today's market it's this: be nimble, because rules will change.

Mighty Swoosh Goes Green With Bluesign

In an effort to clean up its supply chain and source more sustainable materials and chemicals in its products, Nike has partnered with Switzerland-based Bluesign Technologies to use its sustainable sourcing standard.

As the world's largest sportswear brand, Nike's supply chain spans 50 countries, 800 contract factories, and hundreds of textile manufacturers that supply them. Based on its own analysis, Nike found that 60 percent of the environmental impact from a pair of shoes comes from the materials used. So, in 2011, the company announced an effort to eliminate all releases of hazardous chemicals across its global supply chain by 2020.

Using Bluesign's Bluefinder tool, a supplier can access pre-screened and more sustainable textile preparations—including dye systems, detergents, and other process chemicals used in manufacturing. The tool enables suppliers to manage restricted substances, and provides the opportunity to increase water and energy efficiency.

Another tool, Blueguide, allows Nike access to more than 30,000 materials that have been produced using these sustainable chemicals.

Before partnering with Bluesign, Nike had to assess individual factories and suppliers, which was a time and capital drain.

"To shift to a palette of entirely sustainable materials, multiple stakeholders must work together to innovate new chemistry, encourage the use and scale of better chemistry, and eliminate harmful chemistry," says Hannah Jones, Nike's vice president of sustainable business and innovation.

Home Court Advantage: Lean

Many companies are turning to lean principles in lieu of moving offshore to streamline and augment manufacturing capacity.

One example is Daktronics, the world's largest supplier of computer-programmable displays and electronic scoreboards. In 2006, the Brookings, S.D.-based company began implementing lean production techniques throughout its 725,000-square-foot manufacturing footprint in order to establish repeatable processes and reduce lead times.

It also provided the company greater latitude to shorten its supply chain and eliminate unnecessary logistics expense.

"Daktronics assembles the components of our modules domestically," says Andal. "We are able to do this by continually improving engineering and manufacturing process efficiency."

Food Regulation for Thought

When it comes to food safety, quality, security, and regulatory compliance, companies are well aware of the consequences. Anything that shakes brand confidence leaves a lingering bad taste.

Those stakes will be raised when the Food Safety Modernization Act (FSMA) is finally rolled out after lengthy review. The total impact on shippers remains pure conjecture. Further rulemaking, and the current sequestration on federal spending, will likely delay any resolutions or enforcement in the near term.

FSMA was signed into law in January 2011 to instruct the U.S. Food and Drug Administration (FDA) on how to better manage and respond to product recalls, as well as put in place a regulatory architecture to prevent such occurrences from happening in the first place. It had been more than 70 years since the U.S. government last introduced any significant food legislation. Change was necessary and widely welcomed.

But any modification to food handling and transportation practices has a rippling impact throughout the supply chain, especially as it relates to tracking, traceability, and chain of custody. The third-party logistics (3PL) sector is front and center in this unfolding regulation because of the important role it plays as a transportation and distribution facilitator.

This presents a problem. Congress has passed "evolving" legislation that directly targets 3PLs—but policymakers don't know what a 3PL is.

"Many Congress members, senators, and regulators still have no idea what a warehouse-based 3PL does," said Patrick O'Connor, partner in the Washington-based practice Kent & O'Connor, and legal liaison for the International Warehouse Logistics Association (IWLA). He spoke at IWLA's annual conference in March 2013.

While O'Connor acknowledged that the costs of FSMA compliance will "cause some heartburn" for 3PLs, food safety and security has become a hot-button issue, and government expects all supply chain players to be part of the solution. In particular, this accountability extends to large food companies that stand to lose the most when bad publicity about good products runs amok.

"Big brand manufacturers are not interested in letting any segment of the supply chain off the hook," said O'Connor. "They want everyone in the boat with them."

Still, vague interpretations and amended rulemaking muddle the legislation. The new Hazard Analysis and Risk-Based Preventive Controls provision, for example, directly impacts warehouse-based 3PLs. Each facility subject to this rule would be required to implement a written food safety plan that focuses on preventing food product hazards. This includes protocol for triggering recalls and notifying consignees and the general public.

The provision will require companies to revise current good manufacturing practices, and regularly update and sign off on plans that incorporate new food products that enter a warehouse.

The preventive controls rule applies to "any facility that manufactures, processes, packs, or holds human food," O'Connor explained. "This includes any facility that is required to register with the FDA under the Bioterrorism Act amendments of 2001."

Exemptions to the preventive controls rule are vague. If a facility is solely engaged in the storage of non-refrigerated packaged food, but that food is not exposed to the environment—meaning workers cannot physically touch a product—then it would be exempt from implementing a food safety plan.

As an example, O'Connor cited a case where strawberries were warehoused in plastic clamshell packaging. The FDA considered that product a packaged good. However, if strawberries were packaged in a box or crate with vent holes—and could in theory be touched by individuals—that facility would not qualify for the exemption. The context of the rule still lacks clarity.

While federal and state regulatory policies serve an important purpose, layers of bureaucracy and complexity also add costs and inefficiencies to the food chain.

"Transportation providers now have to comply with the Sanitary Food Transportation Act and the FSMA. Trucking companies that historically have been regulated by federal and state DOTs now have to deal with the USDA, U.S. Department of Health and Human Services, and Homeland Security. Various state agencies are now jumping into the transportation regulation mix," said Ken Esser, director of logistics at CSM Bakery, during a food panel discussion at the Georgia Logistics Summit in March 2013.

CSM Bakery is an Atlanta-based amalgamation of several companies that produces icings, cakes, muffins, and cookies at 12 plants across the United States. Keeping track of regulatory measures in other parts of the country is difficult, acknowledged Esser.

He pointed to recent developments in California. Expanding on the state's notoriously stringent emissions standards, the California Air Resources Board now holds shippers and consignees accountable for hiring third-party partners whose reefers don't meet the state's Transportation Refrigeration Unit regulation. Previously, the owner of a non-compliant unit could be fined up to $10,000. Now liability is extended throughout the supply chain.

"If I'm in Atlanta, and book a load to California, I can get fined $10,000 if my carrier's equipment does not meet California's standards," explained Esser.

While the food industry is a fluid regulatory environment, safety and security remain priorities. It is incumbent upon supply chain partners to stay vigilant and proactive.